Junaid Raza Syed (Senior Editor/Department Manager FS)
As home prices in Australia are dragged down for the ninth consecutive month due to weakening property markets in Sydney and Melbourne, many are speculating that home buyers could be facing a ‘negative equity’.
Housing Market Slumps in Value
Housing values fell yet again by 0.2 per cent in June, bringing the total decline to 0.8 per cent so far this year, according to figures released by CoreLogic on Monday. But despite the decreasing figure for nine consecutive months, home prices are still 32.4 per cent higher than they were five years ago.
Tim Lawless, the research head for CoreLogic, says that while the incredible growth phase over the past few years indicates the wealth creation experienced by homeowners, new property buyers could be facing a negative equity due to dampened market conditions.
According to Lawless, the weaker market conditions are driven primarily by factors like slow investment activity, and tighter lending practices. Even after the Australian Prudential Regulation Authority relaxed its 10 per cent investment limit earlier this month, market conditions are expected to deteriorate throughout the rest of 2018.
Most of the weakness is concentrated in Sydney and Melbourne’s housing markets, which have fallen by 0.5 per cent and 0.2 per cent respectively in just over a month. Markets in Canberra, Perth and Darwin also experienced a median decline by 0.2 per cent. However, Brisbane, Hobart and Adelaide, which are considered the most affordable housing market on the east coast of Australia, saw an increase in prices since April.
Why Sydney and Melbourne Matter
Apart from Sydney and Melbourne, almost all Australian capitals have experienced a price increase ranging from 0.1 to 3.7 per cent in Perth and Hobart over the second quarter. On the other hand, Melbourne’s median home values have declined by 1.2 per cent whereas Sydney has experienced a 0.9 per cent loss over the past three months.
Even though the loss of median values in Sydney and Melbourne are smaller in comparison to 3.7 per cent gain in other markets, the sheer size of the two markets makes the decline big enough to offset gains in all other areas, reducing the national median value by 0.3 per cent.
Lawless explains that Sydney and Melbourne account for 40 per cent of the total number of houses in Australia’s real estate market and around 60 per cent of the national market value which is why even a slight change in its figures has a large impact on the performance of the market as a whole. This explains why housing prices around the country fell quickly after a market decline in Melbourne, Sydney and Perth despite gains on other regional and capital cities.
While the most affordable cities which make up around a quarter of the nation’s real estate market saw an annual increase of 1 per cent and the broader middle market a 2.3 per cent gain, the only housing segment that recorded a decline was a small, but expensive section of the market.
Tighter Lending Standards
But as lending standards in smaller banks and non-banks become even tighter, Lawless fears that mortgage rates could become higher, making market conditions even worse. But credit availability isn’t the only factor behind the decline. New buyers are finding it increasingly difficult to afford properties in Sydney and Melbourne’s expensive markets, which is driving demand to cheaper cities like Perth and Hobart.
The median price to earning ration in the two most expensive cities of Australia is as high as 9.3 per cent, and with credit availability becoming tighter which is reducing future homeowners’ borrowing capacity , it is becoming increasingly difficult to fund a house with just savings.
Despite the faltering demand in Sydney’s biggest housing markets, other regional and capital cities haven’t experienced a significant decrease in market value, and some have even recorded gains over the past 12 months. Lawless assures that the houses prices are not going to fall off a cliff just because of a few bad months. In areas where prices are much higher in comparison to earnings, the market is expected to cool down until lending rules are relaxed.
